Downturn in Japan: Who Benefits?

Although hard to imagine today, it is a little known fact that despite China’s precipitous rise since the implementation of fundamental economic reforms under Deng Xiaoping in the late 1970’s and early 1980’s, Japan remained the world’s second largest economy until 2008. Since then, China has emerged as the undisputed economic king of the region, and recent events in Japan threaten to skew this imbalance even further.

It all started in April when the Japanese government increased the national sales tax rate from 5% to 8%, in order to raise revenue to close its budget gap. While it accomplished this narrow goal, this move also had the highly undesirable effect of decreasing consumer spending.

As a result, Japan’s economy shrank 1.6% from July to September, according to USA Today, following a 7.1% decline in the previous quarter. Japan’s recent economic struggles haven’t just affected its own economy, however. Indeed, the downturn in the world’s third-largest non-EU economy is having a ripple effect on markets throughout the world, with one prominent exception.

In the United States, the Dow, NASDAQ, and S&P 500 indices all rose on Tuesday, November 18, according to MSN Money. What gives?

For one reason, the United States’ economic performance is not closely tied with the performance of Japan’s economy. Only 4.1% of American exports are shipped to Japan, according to the US Trade Representative’s Office and IHS Global Insight, who also say that those exports only account for 1% of the US’ total GDP.

In addition, Japan’s government is likely to take steps to stabilize the economy. Though Japanese Prime Minister Shinzo Abe’s $117 billion stimulus two years ago failed to grow the economy as much as policymakers there would have liked, Abe’s government still has a few more cards to play.

One of those cards is a halt to further planned increase in the sales tax rate for the next 18 months, which Abe announced recently. Initially, the tax was set to increase a further 2 percent, from 8% to 10% and would have taken effect next year.

Another card is its falling currency. With a weaker yen, Japan would be able to boost exports, and thus domestic firms in Japan would benefit and the economy overall may grow.

While few serve to benefit from Japan’s recent economic tribulations, one country in particular is likely eyeing the situation with particular interest. China, long on the sidelines to Japan’s powerhouse economy before the turn of the 21st century, will ultimately serve to benefit unless Japan can right the ship soon. In its quest to become the economic hegemon of East Asia, visible in the strong messages to neighboring countries it has sent recently, China may yet have received a new boost, at the expense of a major competitor.